Invoice factoring is great for companies looking to shore up their cash flow. But, you may be thinking, “my customers are slow to pay me. What if they’re slow to pay the factoring company – or can’t pay at all?”
Different Factoring Options for Different Needs
Fortunately, there are two types of invoice factoring programs that you may choose depending on your customers’ reliability: recourse factoring and non-recourse factoring.
The Invoice Factoring Process
The typical invoice factoring process goes something like this:
- You submit an unpaid invoice for work completed
- The factor verifies the invoice and advances you a percentage of the invoice value
- The remaining funds go into a reserve account
- The factor collects from your customer and releases the reserve amount to you, minus their fees
However, there is a difference between recourse and non-recourse factoring. Read more below to find out which would be best for your business!
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Lower fees, higher liability
You have to cover unpaid invoices
Rates range from 1-3%
Advances can be as high as 95%
Higher fees, lower liability
Unpaid invoices are covered (under certain circumstances)
Rates range from 3-5%
Advances can be as high as 100%
Recourse Invoice Factoring
The standard structure of an invoice factoring relationship is recourse factoring.
“Recourse” is the amount of time a factoring company will leave an invoice open before they require it to be paid. In a recourse factoring program, you as the client will be required to close any unpaid invoices once they are outside the recourse period. If the invoice goes outside of its recourse period, the factor has the option to charge back the invoice, either by deducting it from your reserve account or by withholding that amount from subsequent funding requests.
The fee structure for a recourse factoring program is typically lower and accumulates during the time the invoice remains open. Advance levels usually remain in the 70 to 90 percent range. Recourse factoring is a boon to companies with steady, reliable payers because of the potential to dramatically lower your factoring costs.
Non-Recourse Invoice Factoring
Non-recourse factoring, as the name suggests, is an invoice factoring program in which there is no timeframe for your invoice to be closed. It is a “safer” alternative to recourse factoring in that the factoring company assumes a higher level of risk for unpaid invoices. Strictly speaking, if your customer is unable to pay a bona fide invoice then the factor will not charge it back to your account.
(Note: non-recourse factoring does NOT cover situations in which the customer disputes the invoice, either for accuracy or due to an issue with the product or service.)
Greater security does come at a price: non-recourse factoring fees are higher than recourse fees (average 3 to 5 percent) and are usually charged as a flat fee. Advances in a non-recourse factoring relationship may be as high as 100 percent of the invoice after fees, because there are no additional fees for you to pay. This factoring structure can become expensive, however, and should only be used if you work with customers that typically take a much longer time to pay.